A proper understanding and integration of environmental, social and governance (ESG) factors is increasingly critical to the long-term viability of re/insurance companies, according to research by AM Best.
The special report, titled Insurers and Reinsurers: Ignoring ESG Factors Poses Reputational Risk, found the majority of re/insurers recognise the importance of developing an ESG strategy, but are struggling to take the necessary action to bring these strategies to fruition.
The report found that a lack of transparent and comparable definitions and data, in particular, is preventing greater progress in implementing ESG strategies for insurance and reinsurance companies.
The report found that re/insurers have prioritised implementing ESG principles into their investment activities, with only a few respondents highlighting underwriting initiatives.
As both risk carriers and institutional investors, insurers and reinsurers occupy a unique position in the ESG space, AM Best said.
“ESG factors have the potential to affect both sides of their balance sheets and impact their results, throwing the spotlight on the importance of integrating them into underwriting and investment activities,” it explained.
The report warned that failure to act on stakeholder pressure around ESG issues could lead to long-term reputational challenges for individual companies and the insurance industry generally. Companies that are integrating ESG factors into their investment mandates said reducing reputational risk was the main reason for doing so.
Larger companies were more likely to make the link between failure to act and the longer term reputational consequences, AM Best’s report found.
Corporate governance, product liability including cyber security, and climate risk were cited as the most relevant ESG issues for the insurance industry.
AM Best’s report surveyed nearly 100 insurance and reinsurance companies.